Economics plays a vital role in how households are taxed, which is called income tax or direct taxation. The impact of taxation on households have several effects such as higher tax rates means households have less discretionary income that can be spent or saved. Also, higher income tax rates reduce household’s take-home pay and can reduce the incentive to work. This incentive effect can result in the substitution effect, which means higher taxes leads to lower wages and workers wanting to work less overall. Another effect of household taxation is called the income effect, which leads to workers feeling the need to work longer hours to maintain their income level or work longer in the job market beyond retirement age because of lack of retirement funds to sustain their lifestyle.

Taxation on businesses increases the cost of investing in business capital expenditures such as machinery or equipment, which businesses use to be more productive. When businesses are productive, then the economy tends to grow. The reverse is true as well, so by increasing business taxes means the business has less money to spend to invest in capital expenditures which negatively affects productivity growth. This type of scenario creates one of the largest negative impacts on economic growth compared to other taxes.

Tariffs are specific taxes levied on an imported good at our national borders. This type of taxation has historically been a tool for governments to collect revenues and provide a way to protect domestic industry and production. By increasing the price of imports, then consumers would choose to buy domestic products over imports because the price of the domestic product is less than the imported product. Also, governments have been known to impose higher tariffs to exert political leverage over another country. Overall, tariffs have a bad reputation because of the negative consequences they have caused the U.S. economy in certain situations that resulted in more harm than good.

In my career field, higher taxes equate to less money for my company to invest in capital expenditures, which results in stagnated growth and opportunities within my company’s industry of construction and real estate. The higher tax rates and/or tariffs means less money that my company has to use to purchase machinery and equipment. Larger amounts of capital must be contributed to these purchases, which is a huge strain on cash flow. The overall effect means less growth opportunities, lower employee wages, and sometimes a loss of jobs.

It is important to understand economics because there are positive and negative effects on discretionary spending by individuals and businesses depending on the tax situation. Less taxes means higher growth and more taxes means less opportunities for growth because companies begin to hoard cash in case of economic recession or GDP stagnation. In my case, higher taxes cause my company to not take on risk and being more conservative on projects which stunts growth in the short or long term.